TABLECONTENT

5.ACCOUNTI
NGFORCORPORATI
ON.
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5.
1NATUREOFACORPORATI
ON.
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1

5.
2BASI
CCHARACTERSOFCORPORATION
/
SHARECOMPANI
ESANDPLCs..
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.2

5.
2.1ADVANTAGEOFCORPORATE
FORM ORGANI
ZATI
ON.
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.2

5.
2.1DI
SADVANTAGEOFCORPORATE
FORM ORGANI
ZATI
ON..
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2

5.
3SHAERCOMPANYI
NETHI
OPI
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.3

5.
4PAI
DINCAPI
TALFROM SHARE.
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.4
5.
4.1CHARACTEROFSHARE/
STOCKS.
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4

5.
4.2CLASSOFSTOCKS.
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.4

5.
4.3I
SSUI
NGSTOCKS.
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4

5.
5ACCOUNTI
NGFORDI
VIDI
NG.
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.5

5.
5.1CASHDI
VIDES.
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.5

5.
5.2STOCKDI
VIDES.
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.5

5.
6STOCKSSPLI
T..
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6

5.
7TREASURESTOCKTRANSACTI
ON.
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7

5.
8REPORTI
NGSTOCKHOLDEREQUI
TYONTHEBALANCESHEET.
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8

5.
9SUMMARY.
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.9

5.
9.1REFERENCE.
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.10
 ACCOUNTI
NGFORCORPORATI
ON

OVERVI
WE
Cor
por
ati
on i
scl
assi
fi
edasnonpr
ofi
tor pr
ofi
tseeki
ng or
gani
zat
ion.
Nonpr
ofi
tcor
por
ati
onsi
ncl
udet
hoseor
gani
zedf
orr
ecr
eat
ional
,educat
ional
,
char
it
abl
e,r
eli
giousi
nst
it
uti
onsandot
herphi
lant
hropi
cpur
poseswher
eas
Pr
ofi
tcor
por
ati
onsar
eengagedi
nbusi
nessact
ivi
tyt
heydependupon
pr
ofi
tabl
eoper
ati
onf
ort
hei
rcont
inuousexi
stence.Acor
por
ati
oni
saf
orm
ofbusi
nesst
hati
s ownedbysever
ali
nvest
ors.The owner
shi
pina
cor
por
ati
oni
sdi
vi
dedi
ntoshar
esandowner
sofacor
por
ati
onar
ecal
led
st
ockhol
der
s(or shar
ehol
der
s).Thei
nvest
ment
s of st
ockhol
der
sar
e
r
efer
redt
oast
hecapi
talst
ock(
orst
ock)oft
hecor
por
ati
on.Thecor
por
ate
f
orm ofbusi
nessi
swel
lsui
tedt
orai
si
ngl
argeamount
sofcapi
talbecause
cor
por
ati
onscansel
lst
ockt
o manyt
housands of i
nvest
ors.Thus,
cor
por
ati
ons,gener
all
yspeaki
ng,ar
elar
ger–i
nter
msofear
nings,asset
s
owned,andpeopl
eempl
oyed–t
hansol
epr
opr
iet
orshi
psandpar
tner
shi
ps.
Account
ingf
orcor
por
ati
onsdi
ff
ersf
rom account
ingf
orot
herf
ormsof
busi
nessi
nthet
reat
mentoft
ransact
ionst
hataf
fectst
ockhol
der
s’equi
ty.

5.
1NATUREOFCORPORATI
ON
A) Acor
por
ati
oni
sal
egalent
it
yhav
inganexi
stencesepar
ateanddi
sti
nctf
rom t
hat
ofi
tsowner
s.I
ntheey
esoft
hel
aw t
her
ear
etwoper
sonsandacor
por
ati
oni
san
‘
art
if
ici
alper
son’
hav
ingmanyofi
tsownr
ight
sandr
esponsi
bil
i
ties.
B)A cor
por
ati
ondi
ff
ersf
rom sol
epr
opr
iet
orshi
psandpar
tner
shi
psi
nthatmany
shar
ehol
der
sown i
t.Tr
ansf
erabl
est
ocksr
epr
esentowner
shi
pin a cor
por
ati
on.A
cor
por
atef
orm ofbusi
nessi
spr
efer
abl
etoot
herf
ormsofbusi
nessi
nsomer
espect
s.
5.
2CHARACTERI
STI
CSOFCORPORATI
ON
Amongt
hechar
act
eri
sti
csofacor
por
ati
onar
e:
 a)Acor
por
ati
oni
sasepar
atel
egalent
it
y.Accor
dingt
othel
awacor
por
ateent
it
y
mayownpr
oper
tyi
nit
sownname,mayent
eri
ntocont
ractandr
esponsi
blef
ori
ts
owndebt
s.
b)Acor
por
ati
onhasal
egalst
atusi
ncour
t.Accor
dingt
othel
awacor
por
ati
onmay
sueandbesuedasi
fitwer
ear
eal
per
son.
c)Acor
por
ati
onhasi
tsownchar
ter
.Acor
por
ati
oni
scr
eat
edbyobt
aini
ngchar
ter
f
rom t
hest
atei
nwhi
cht
hecompanyi
stobei
ncor
por
ated.
d)
Acor
por
ati
onpay
sincomet
axesoni
tsear
nings.Thei
ncomeofacor
por
ati
oni
s
subj
ectt
oincomet
axes,
whi
chmustbepai
dbyt
hecor
por
ati
on.

5.
2.1ADVANTAGEsOFTHECORPORATEFORM OFORGANI
ZATI
O

Acor
por
ateent
it
yhasmanyadv
ant
agesnotav
ail
abl
einot
herf
ormsofor
gani
zat
ion.
Amongt
headv
ant
agesar
ethef
oll
owi
ng
A)CONTI STENCEC:Ac
UOUSEXI or
por
ati
onhasper
pet
ualexi
stencei
nthati
tscont
inuous
exi
stencei
snotdi
ssol
vedbyt
hedeat
honr
eti
rement
sofanyofi
tsmember
s.

B)NOPERSONALLI
ABI
LITYFOROWNERS:Si
nceacor
por
ati
oni
ssepar
atel
egalent
it
y,t
he
cr
edi
tor
sofacor
por
ati
onhav
eacl
aim agai
nstt
heasset
soft
hecor
por
ati
on,
nott
he
per
sonal
proper
tyoft
heowner
s.

C)
SEPARATI P:t
ON OFMANAGEMENTFROM OWNERSHI heowner
sofacor
por
ati
on(
cal
l
ed
st
ockhol
der
sorshar
ehol
der
s)ownt
hecor
por
ati
onbutt
heydonotmanagei
tona
dai
l
ybasi
s.Toadmi
nist
ert
heaf
fai
rsoft
hecor
por
ati
on,
presi
dentandot
herof
fi
cer
s
ar
ehi
redf
ori
t.Thus,i
ndi
vi
dualst
ockhol
derhasnor
ight
stopar
ti
cipat
eint
he
management
'sact
ivi
tyoft
hecor
por
ati
onunl
esst
hest
ockhol
derhasbeenhi
redasa
cor
por
ateof
fi
cer
.
D)
EASI PSHARES:o
LYTRANSFERABLEOWNERSHI wner
shi
pofacor
por
ati
oni
sev
idencedby
tr
ansfer
ableshar
esofstocks.Thesesharesofstocksmaybesoldbyonei
nvest
ort
o
anotherwi
thoutdi
ssol
vi
ngordisrupti
ngthebusi
nessorgani
zat
ion.

5.
2.1DI
SADVANTAGEOFCORPORATEFORM OFORGANI
ZATI
ON

Someoft
hedi
sadv
ant
agesoft
hecor
por
ati
onar
e:
ON:c
A)DOUBLETAXATI or
por
ateear
ningsar
etaxedt
wot
imes.Theear
ningsar
etaxedf
ir
st
asacor
por
atei
ncomet
axesandagai
nasper
sonali
ncomet
axesi
fthecor
por
ati
on.
Di
str
ibut
esi
tsear
ningst
ost
ockhol
der
s.

B)
DIFFI ESTO CONTROL:s
CULTI i
nceowner
shi
pisusual
l
ysepar
atedf
rom management
s,
owner
sar
eunabl
etoexer
ciseact
ivecont
rol
overmanagementact
ions.

ON:s
C)GREATERREGULATI i
nceacor
por
ati
oncomesi
ntoexi
stenceaccor
dingt
othel
awof
thestat
e,thel
awmayprov
ideforconsi
der
abler
egulat
ionofthecorpor
ati
on’sacti
vi
ti
es.
Forexample,t
hewi
thdr
awaloffundsfr
om acor
porati
onissubject
stocert
ainli
mits
setsbylaw.

5.
3Shar
ecompanyi
nEt
hiopi
an

Theshar
ecompanyi
sfundament
all
ydi
ff
erentf
rom t
heot
herf
ormsofbusi
nessor
gani
zat
ions.Al
lofi
tsmember
senj
oyl
i
mit
ed
l
iabi
li
ty.I
tmayconsi
stofmanymembers.Member
shipi
sfr
eel
ytransf
erabl
e.Shar
eCompanyi
sthef
orm ofbusi
nessor
gani
zat
ion
usual
lychosent
ooperat
eenter
pri
seswhi
chr
equi
rehugeamountofmoney.

Forashar ecompany, t
hecapit
alshal
lnotbel essthan50,000Birrasthelawstandsnow.Ashar ecompanymaynotbeest abl
ished
bylesst hanfiv
emember s.Personswhosi gnthememor andum ofassoci
ati
onandsubscribethewholeofthecapit
alshall
havethe
l
egal statusoffounders.Thefounder
smayr eservepersonall
ytothemselvesatleastonef
ift
hofthenetprofi
ts.Thi
sisinadditi
on
totheirright
sasshar ehol
ders.However,suchr i
ghttogetone-fi
fthofthenetprofi
tsmustbementionedi
nt hememor andum of
association.

Ashar
ecompanyshal
lnotr
emai
ninbusi
nessf
ormor
ethansi
xmont
hsaf
tert
henumberofmember
sisr
educedt
olesst
hanf
ive.

5.
4pai
dincapi
tal
from shar
e
Paid-
incapit
alisthet
otalamountrecei
vedfr
om thei
ssuanceofcommonorpref
err
edstock.I
tis
cal
culat
edbyaddi ngtheparvalueoft
heissuedshar
eswit
ht heamountsr
ecei
vedi
nexcessofthe
shar
es'parvalue.

5.
4.1CHARACTERSOFSHARE/
STOCKS

Whennumberofshar esofst ockthatacor porationisaut hor izedt oissuei sst atedinitscharter.The

termi ssuedr ef erstotheshar esissuedt ot hest ockholders.Acor porationmayr eacqui resomeoft he
stockt hatithasi ssued.Thest ockremainingi nthehandsofst ockhol dersist hencal l
edout standing
stock.Ther el ationshipbetweenaut hori
zed, issued, andout standi ngst ocki sshowni nthegr aphicatt he
l
eft.
Uponr equest ,corporati
onsmayi ssuestockcer t
ifi
catestost ockhol derst odocumentt heirownership.
Printedonast ockcer ti
fi
catei sthenameoft hecompany ,t
henameoft hest ockhol der,
andt he
numberofshar esowned.Thest ockcerti
fi
cat emayal soindicat eadol laramountassi gnedt oeachshar e
ofst ock,calledparv al
ue.St ockmaybei ssuedwi thoutpar ,inwhi chcasei tiscalledno-parst ock.In
somest ates, theboar dofdi rectorsofacor por at
ioni srequiredt oassi gnast atedv al
uet ono-parstock.
Cor porati
onshav eli
mi t
edl i
abi l
it
yand,thus, creditorshavenocl aim agai nststockhol ders’personal
asset s.Topr ot ectcredit
ors, howev er
,somest at
esr equir
ecor por ati
onst omai ntainami ni
mum
amountofpai d- i
ncapital.Thismi nimum amount ,call
edlegal capi tal,usuallyincludest heparorst ated
valueoft heshar esissued.
Themaj orright sthataccompanyowner shipofashar eofst ockar easf ollows:
1.Ther
ightt
ovot
einmat
ter
sconcer
ningt
hecor
por
ati
on.

2.Ther
ightt
oshar
eindi
str
ibut
ionsofear
nings.

3.Ther
ightt
oshar
einasset
sonl
i
qui
dat
ion.

Thesest
ockr
ight
snor
mal
l
yvar
ywi
tht
hecl
assofst
ock.

5.
4.2CLASSESOFSTOCKS

Whenonl yonecl assofst ockisi ssued, i

tiscalledy nst ock.Eachshar eofcommonst ockhasequal
ri
ght s.Acor porati
onmayal soissueoneormor ecl assesofst ockwi t
hv ar i
ouspr eferencer ightssuchas
apr efer encet odivi
dends.Suchast ockiscal l
edapr eferredstock.Thedi vi dendr ightsofpr eferredst ock
arest at edei t
herasdol l
arspershar eorasaper centofpar .Forexampl e, a$50parv aluepr ef err
edst ock
witha$4pershar edividendmaybedescr ibedasei ther:5$4pr eferredst ock, $50paror8%pr eferred
stock, $50parBecauset heyhav ef i
rstrights(prefer ence)t oanydi vidends, pref erredst ockhol der shav e
agr eat erchanceofr eceivingdividendst hancommonst ockhol ders.Howev er,sincedi videndsar e
nor mal lybasedonear ni
ngs, acorpor ati
oncannotguar anteedi vi
dendsev ent opr eferr
edst ockhol der s.
Thepay mentofdi videndsi sauthor i
zedbyt hecor por ation’sboardofdi rector s.Whenaut horized, the
di
r ector sar esaidtohav edeclaredadi vi
dend.Cumul ativepr ef
erredst ockhasar i
ghtt or eceiv eregular
di
v idendst hatwer enotdecl ared( paid)inpr i
oryear s.Noncumul ati
v epref erredst ockdoesnothav ethi s
ri
ght .Cumul ativepreferredstockdi videndst hathav enotbeenpai dinpr iory earsar esai dt obei nar r
ear s.
Anypr ef er
reddi vi
dendsi nar r
earsmustbepai dbef or eanycommonst ockdi v
idendsar epai d.Inaddi tion,
anydi v i
dendsi narrearsarenor mal lydisclosedinnot est ot hefinancialst atement s.
Toi ll
ust rate,assumet hatacor porationhasi ssuedt hef ollowingpr eferredandcom monst ock:

1,
000shar
esof$4cumul
ati
vepr
efer
redst
ock,
$50par

4,
000shar
esofcommonst
ock,
$15par

Thecor por ati

onwasor ganizedonJanuary1,2008, andpaidnodividendsin2008and2009.In2010, the
corporationpai ddi
v i
dendsof$22, 000.Exhi
bit4showshowt he$22,000ofdi
v i
dendspai
din2010i s
dist
ri
but edbet weent hepr eferr
edandcommonst ockholders.I
nadditi
ontodivi
dendprefer
ence,preferr
ed
stockmaybegi venpr eferencestoassetsifthecorporati
ongoesoutofbusi nessandisli
qui
dated.
Howev er, clai
msofcr edi t
orsmustbesat i
sfi
edfir
st.Preferr
edstockholder
sarenextinli
netoreceiveany
remainingasset s,fol
lowedbyt hecommonst ock.

5.
4.3I
SSUI
NGSTOCK

Asepar at
eaccountisusedforrecordi
ngtheamountofeachclassofst ockissuedtoinvestor
sina
corporati
on.Forexample,
assumet hatacorpor
ati
oni
sauthorizedtoissue10,000sharesof$100par
prefer
redstockand100,000sharesof$20parcommonst ock.Thecorporati
oni ssued5,000sharesof
prefer
redstockand50,000sharesofcommonst ockatparforcash.Thecor porati
on’
sent r
ytorecordt
he
stockissueisasfoll
ows:

Cash.
..
..
..
..
..
..
..
..
..
..
..
..
.1,
500,
000

Pr
efer
redSt
ock.
..
..
..
..
..
..
..
.500,
000

CommonSt
ock.
..
..
..
..
..
..
..
.1,
000,
000

I
ssuedpr
efer
redst
ockandommon

st
ockatparf
orCass
Stockisof
teni
ssuedbyacorporat
ionatapr
iceotherthani
tspar
.Thepr
iceatwhi
chst
ocki
ssol
d
dependsonavari
etyoff
act
ors,suchasthef
ollowing:

1.Thef
inanci
alcondi
ti
on,
ear
ningsr
ecor
d,anddi
vi
dendr
ecor
doft
hecor
por
ati
on.

2.I
nvest
orexpect
ati
onsoft
hecor
por
ati
on’
spot
ent
ial
ear
ningpower
.

3.Gener
albusi
nessandeconomi
ccondi
ti
onsandexpect
ati
ons.

Ifstockisissued(sol
d)forapr i
cethati
smor ethani tspar,t
hest ockhasbeensol datapr emi
um.For
exampl e,i
fcommonst ockwi thaparof$50issol df or$60pershar e,
thestockhassoldatapr emium of
$10.Ifstockisissued(sol
d)forapr i
cethati
slesst hani t
spar,thestockhasbeensol datadiscount.For
exampl e,i
fcommonst ockwi thaparof$50issol df or$45pershar e,t
hestockhassol datadiscountof
$5.Manyst at
esdonotper mitstocktobesoldatadi scount
.Inotherstat
es, st
ockmaybesol data
discountinonlyunusualcases.Sincest
ockisrarelysol datadiscount,i
tisnotill
ust
rated

5.
5ACCOUNTI
NGFORDI
VIDENDS

Whenaboar dofdi
rector
sdeclar
esacashdivi
dend,i
tauthori
zest
hedistr
ibut
ionofcasht o
st
ockholder
s.Whenaboar dofdir
ector
sdecl
aresastockdivi
dend,i
taut
horizesthedistr
ibut
ionofi
ts
st
ock.Inbothcases,
decl
aringadivi
dendr
educestheret
ainedearni
ngsoft
hecor porat
ion.
5.
5.1CASHDI VIDENDs

Acashdi
str
ibut
ionofear
ningsbyacorporat
iontoit
sshar
eholder
sisacashdivi
dend.Alt
hough
di
vi
dendsmaybepaidinot
herasset
s,cashdi
videndsarethemostcommon.Threecondi
tionsforacash
di
vi
dendar
easfol
lows:

1.Suf
fi
cientr
etai
nedear
nings

2.Suf
fi
cientcash

3.For
mal
act
ionbyt
heboar
dofdi
rect
ors

Ther emustbeasuf fi
cient(largeenough)bal ancei nRetainedEar ni
ngst odeclareacashdi vidend.Thatis,
thebal anceofRet ainedEar ningsmustbel argeenoughsot hatthedi vi
denddoesnotcr eateadebi t
balancei ntheretainedear ningsaccount .Howev eral
argeRet ainedEarningsbal ancedoesnotmeant hat
thereiscashav ailabletopaydi vidends.Thisi sbecauset hebalancesofCashandRet ainedEar ningsare
oftenunr el
ated.Ev eniftherear esuf fi
cientretainedearningsandcash, acorporation’
sboar dofdi r
ector
s
i
snotr equir
edtopaydi vidends.Nev erthel
ess, manycorpor at
ionspayquar terl
ycashdi videndst omake
theirstockmor eat tr
activetoi nvestors.Speci alorextr
adi vi
dendsmayal sobepai dwhenacor porati
on
exper i
enceshighert hannor mal profi
ts.
Threedatesi ncludedi nadi videndannouncementar easf ol
lows:

1.Dat
eofdecl
arat
ion

2.Dat
eofr
ecor
d

3.Dateofpay
ment
TheDATEOFDECLARTI ONisthedatet
heboardofdi
rect
orsf
ormal
l
yauthori
zest
hepay mentoft
he
di
vi
dend.Ont
hisdate,t
hecorpor
ati
onincur
sthel
iabi
lit
ytopayt
heamountoft
hediv
idend

TheDATEOFRECORDi sthedatethecorpor
ati
onusest odeterminewhichstockhol
derswil
lrecei
vethe
divi
dend.Duringtheperi
odoft i
mebet weenthedateofdecl
arationandthedateofrecord,
thestockprice
i
squot edasselli
ngwith-div
idends.Thi
smeanst hatanyi
nvestorspurchasi
ngthestockbefor
et hedateof
recordwil
lreceiv
ethedividend
TheDATEOFPAYMENTi st hedatethecorporat
ionwil
lpayt
hedivi
dendtothest
ockhol
derswhoowned
thest
ockonthedateofrecord.Duri
ngtheper i
odofti
mebetweentherecor
ddateandthepaymentdate,
thest
ockpri
ceisquotedasselli
ngex-di
vidends.Thi
smeansthatsi
ncethedateofr
ecordhaspassed,
anynewinv
estorswil
lnotrecei
vethedivi
dend

Toi
ll
ust
rat
e,assumethatonOctober1Hi
berCor
porat
iondecl
arest
hecashdi
videndsshownbel
ow
wi
thadat
eofrecordofNovember10andadateofpaymentofDecember2.

Di
vi
dendTot
al

perShar
eDi
vi
dends

Pr
efer
redst
ock,
$100par
,5,
000shar
esout
standi
ng......$2.
5. $12,
500

Commonst
ock,
$10par
,100,
000shar
esout
standi
ng.....$0.
30 30,
000

Tot
al..........................................
..
..
..
..
..
.. $42,
500

OnOct
ober1,
thedecl
arat
iondat
e,Hi
berCor
por
ati
onr
ecor
dst
hef
oll
owi
ngent
ry

oct1 CashDi
vi
dends.
..
..
..
..
..
..
..
..
..
..
..
..
..
42,
500

CashDi
vi
dendsPay
abl
e..
..
..
..
..
..
..
..
..
42,
500

Declaredcashdivi
dends
OnNovember10, t
hedateofrecord,noentr
yisnecessar
y.Thisdatemerel
ydet
ermi
neswhich
stockhol
der
swil
lrecei
vet hedi
vi
dends.
OnDecember2,thedateofpayment, Hi
berCorpor
ati
onrecordsthepay
mentoft
hedi
videndsas
foll
ows:

CashDi
vi
dendsPay
abl
e..
..
..
..
..
..
.42,
500

Cash.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
42,
500

Pai
dcashdi
vi
dends

Attheendoftheaccounti
ngperi
od, t
hebalanceinCashDi v
idendswil
lbetransfer
redtoRetained
Earni
ngsaspartofthecl
osingprocess.Thiscl
osingentrydebitsRet
ainedEarni
ngsandcredit
sCash
Div
idendsf
orthebalanceofthecashdividendsaccount.Ifthecashdi
v i
dendshavenotbeenpai dbythe
endoftheper
iod,CashDivi
dendsPay abl
ewi l
lbereport
edont hebal
ancesheetasacurrentl
iabili
ty

5.
5.2STOKEDI
VIDENDs

Ast ockdi v
idendi
sadistr
ibut
ionofsharesofst
ocktostockhol
ders.Stockdivi
dendsarenormally
declaredonl yoncommonst ockandissuedtocommonstockholders.Therecordi
ngofast ockdi
vidend
aff
ect sonlystockhol
der
s’equit
y.Specif
ical
l
y,t
heamountofthestockdi v
idendistr
ansfer
redfrom
RetainedEar ni
ngstoPai
d-i
nCapi t
al.Theamounttr
ansf
err
edi snormallyt
hef ai
rval
ue(marketpri
ce)of
theshar esissuedint
hestockdivi
dend.9

Toil
l
ust
rate,
assumet
hatt
hest
ockhol
der
s’equi
tyaccount
sofHendr
ixCor
por
ati
onasofDecember15
ar
easfol
lows:

CommonSt
ock,
$20par(
2,000,
000shar
esi
ssue.
..
..
.$40,
000,
000
Pai
d-I
nCapit
al i
nExcessofPar —CommonStock.
..
..
..
..
..
..
9,000,
000
Ret
ainedEar
nings..
..
..
..
..
..
..
..
..
..
.26,
600,
000

OnDecember15,Hendri
xCorpor
ati
ondeclaresastockdivi
dendof5%or100,000shares(
2,000,000
shares5%)tobeissuedonJanuar
y10tost ockhol
dersofrecor
donDecember31.Themar ketpri
ceof
thestockonDecember15(t
hedateofdeclarat
ion)i
s$31pershare.Theent
rytorecordt
hest ock
divi
dendisasf
oll
ows:

St
ockDi
vi
dends.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
3,100,
000

St
ockDi
vi
dendsDi
str
ibut
abl
e..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
.2,
000,
000

Pai
d-I
nCapi
tal
inExcessofPar
––CommonSt
ock.
..
.1,
100,
000

Decstocke5%( 100,000shar
e)st
ock
di
vi
dendon$20parcommonst ock
withamar ketpriceof$31pershar
e.

Aft
erthepr ecedi
ngentr
yisrecor
ded,St
ockDivi
dendswil
lhaveadebitbal
anceof$3,100,
000.Li
kecash
di
vidends,thestockdi
vi
dendsaccounti
sclosedtoRetai
nedEar
ningsattheendoftheaccounti
ngperi
od.
Thi
scl osi
ngent r
ydebi
tsRetai
nedEarni
ngsandcredi
tsStockDi
vi
dends.

Attheendoftheper
iod,
thestockdi
vi
dendsdistr
ibutableandpaid-
incapi
tal
inexcessofpar—common
st
ockaccountsarer
eport
edinthePaid-
inCapi
talsectionofthebal
ancesheet.Thus,
theeff
ectoft
he
pr
ecedingst
ockdivi
dendist
ot r
ansf
er$3,100,
000ofr etai
nedearni
ngstopaid-
incapi
tal
.

OnJanuary10,thest
ockdi
vi
dendisdist
ri
but
edt
ost
ockholder
sbyissui
ng100,
000shar
esofcommon
st
ock.Theissuanceoft
hestocki
srecor
dedbyt
hef
oll
owingentr
y:

Di
vi
dendsDi
str
ibut
abl
e..
..
..
..
..
..
..
..
..
2,000,
000

CommonSt
ock.
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
.2,
000,
000

I
ssuedst
ockasstockdi
vidend
Ast ockdivi
denddoesnotchanget
heassets,
li
abili
ti
es,ort
otal
stockholders’equityofacorporat
ion.
Likewise,
ast ockdi
vi
denddoesnotchangeanindiv
idualst
ockholder’
spr oport
ionatei
nter
est(equit
y)i
n
the

5.
6STOCKSPLI
Ts

Ast ockspli
tisaprocessbywhi chacor porat
ionr educest heparorst atedvalueofitscommonst ock
andissuesapr oportionatenumberofaddi ti
onal shares.Astockspl i
tappliestoallcommonshar es
i
ncludingtheunissued,issued,andtreasuryshares.Amaj orobj ecti
veofast ockspliti
storeducethe
marketpr i
cepershareoft hestock.This,i
nt urn,attr
actsmor ei nvestor
stot hestockandbr oadensthe
ty
pesandnumber sofstockholder
s
Stocks pli
tsoc curwh enma nage me ntwi sh est ored uc et hema rke tpri
c eofs tocks otha t
mor ei nvestorsc ana ffordit.Wh ens toc kiss p l
it,t
h ep arors tat
e dv al
ueoft h estoc kis
reduc eda swe l
last hema rketva l
ue .Howe v er
, thea mou ntsint hep aid-i
nc apitalaccoun ts
aren ota ffect
e d.Con se quentl
y,n ojou rna l
e n t
ry–ot he rtha name mora ndume ntry–i s
nee dedt ore cordthes pli
t.

5.
7TREASURESTOCKTRANSACTI
ON

Capi
talst
ockthati
sreacqui
redbyacor
porati
onist
ermedtr
easur
ystock.Tr
e asur
y
st
ockhasn ovot
ing,di
vi
dend,orot
herst
ockhol
derri
ght
s.St
ockcanbereacqui
redfor
v
a r
iousre asons,suchastohavesharesava i
l
a bl
eford i
str
ibut
iontoe mployeesu nderbonus
pl
an s,andtos uppor
tthema r
ketpri
ceoft hestockb ysti
mu l
ati
ngtradingini
t.Iftr
eas ur
y
st
oc kisresold,nogainorl
ossisrecognizedont heexchangeb ecausethecorporati
on’s
pr
ima ryobjecti
veisnottomakep r
ofitbytradi
ngini t
sowns tock.I
na ddit
ion,
th etr
ea sur
y
st
oc ksaren otasset
s ;
rat
hertheyar
ed educti
on sfrom st
ockholder
se quit
y.
Toi
ll
ustratethecostmethod, assumet hatHar ambeCor por
ationhad50,000shar
es
ofBr.10parcommonst ockoutstandingatt hebegi nni
ngofthecur r
entyear
.The
companypur chased500sharesf orcashandr ecei
v ed500sharesinsettl
ementofa
debtfr
om stockholder
s.Themar ketspr i
ceofst ockswasBr .30/share.Thefol
lowi
ng
entr
yisrequi
redinvolvi
ngthetransactions

Tr
easur
yst
ock 30,
000
Cash 15,
000
Not
esRecei
vabl
e 15,
000
I
fthecompanysel
l
s600shar
esoft
het
reasur
yst
ockf
orBr
.31each,
theent
rywoul
dbe:
st
ock

Cash 18,
600
Tr
easur
yst
ock 18,
000
Pai
dincapi
tal
from sal
eof 600
Tr
easurystock
Pai
dincapi
talf
rom sal
eoftreasur
yst
ocki
srepor
tedi
nthepai
dincapi
tal
sect
ionoft
he
bal
ancesheet
.Tr
easur
yst
ocki
sdeduct
edf
rom t
het
otaloft
hepai
dincapi
taland
Ret
ainedear
nings.
5.
8REPORTI
NGSTOCKHOLDEREQUI
TYONTHEBALANCESHEET
Aswi
thot
hersect
ionsoft
hebal
ancesheet
,al
ter
nat
ivet
ermsandf
ormat
smaybe
usedi
nrepor
ti
ngst
ockhol
der
s’equi
ty.Al
so,changesi
nret
ainedear
ningsandpai
d-i
n
capi
tal
mayber
epor
tedi
nsepar
atest
atement
sornot
est
othef
inanci
alst
atement
s.
Ther
ear
etwomet
hodsf
orr
epor
ti
ngst
ockhol
der
s’equi
ty.
MTHODE1.Eachcl
assofst
ocki
srepor
ted,f
oll
owedbyi
tsr
elat
edpai
d-i
ncapi
tal
account
s.Ret
ainedear
ningsi
sthenr
epor
tedf
oll
owedbyadeduct
ionf
ort
reasur
y
MTHEOD2.Thest
ockaccount
sar
erepor
ted,f
oll
owedbyt
hepai
d-i
ncapi
talr
epor
ted
asasi
ngl
eit
em,Addi
ti
onalpai
d-i
ncapi
tal
.Ret
ainedear
ningsi
sthenr
epor
tedf
oll
owed
cor
por
ati
onf
ort
reasur
yst
ock.
5.
9SUMMARY
ACor
por
ati
onhast
hef
oll
owi
ngmosti
mpor
tantchar
act
eri
sti
cs:
 Separ
atel
egal
exi
stence,
li
mit
edl
i
abi
l
ity
,andt
ransf
erabl
euni
tsofst
ocks.
Thepr
imar
yadv
ant
agesofacor
por
ati
onar
enoper
sonall
i
abi
l
ityofst
ockhol
der
s
f
ort
hedebt
soft
hebusi
ness,t
het
ransf
erabi
l
ityofowner
shi
pshar
es,cont
inui
tyof
exi
stenceandabi
l
ityt
ohi
repr
ofessi
onal
management
s.
St
ockhol
der
sinacor
por
ati
onnor
mal
l
yhav
ether
ight
stoel
ectt
heboar
dof
di
rect
ors,t
oshar
eindi
vi
dendsdecl
aredbyt
hedi
rect
ors,t
oshar
eist
hedi
str
ibut
ion
ofasset
sift
hecor
por
ati
oni
sli
qui
dat
ed,
andt
osubscr
ibet
oaddi
ti
onalshar
esi
fthe
cor
por
ati
ondeci
dest
oincr
easest
henumberofshar
esout
standi
ng.
Commonst
ockr
epr
esent
sthet
ruer
esi
dualowner
shi
pofacor
por
ati
on.These
shar
ehav
evot
ingr
ight
sandcannotbecal
l
ed.Pr
efer
redst
ockhaspr
efer
enceov
er
commonst
ockwi
thr
espect
stodi
vi
dendsandt
odi
str
ibut
ionsi
ntheev
ent
sof
l
i
qui
dat
ion.
Anyt
reasur
yst
ockhel
datt
heendofanaccount
ingper
iodi
sdeduct
edf
rom t
he
t
otal
oft
hepai
d-i
n-capi
tal
andr
etai
nedear
ningsoft
hecor
por
ati
on.
Todet
ermi
net
heequi
typershar
e,t
heequi
tyal
l
ocat
edt
oeachcl
assi
sdi
vi
dedby
t
henumberofshar
esout
standi
ngoft
her
espect
ivecl
ass.
5.
9.1REFERENCS
PRI
NCI
PLEOFACCOUNTI
NG 2MODULE
WARREN,
ACCOUNTI
NG_
__23r
d__
EDI
TION.